FAR and DFARS › DFARS Part 242

DFARS Part 242: Contract Administration and Audit Services

The codified text (eCFR, as of 2026-10-02). Under the Revolutionary FAR Overhaul ↗, agencies follow class deviations with new text for many parts while the formal rules go through the Federal Register: check the solicitation and your contract's clauses, which rule.

In plain English

DFARS Part 242 implements contract administration and audit services for DoD contracts, covering how contracting officers, administrative contracting officers, and auditors manage post-award activities. It matters to contractors because it sets rules for business systems, indirect cost rates, post-award conferences, and other administrative requirements that affect payment and compliance.

Key rules

DoD activities generally cannot retain contracts for administration that require performance at or near contractor facilities, except for certain types of contracts like those with the National Security Agency or for research and development with universities. (242.202)
Contract administration services performed outside the U.S. should follow FAR 42.301 unless no policies exist, in which case you must coordinate with U.S. country teams or commanders. (242.301)
For contracts with the Cost and Software Data Reporting clause, post-award conferences must include a discussion of the contractor's standard CSDR process. (242.503-2)
The corporate administrative contracting officer and individual administrative contracting officers jointly decide how to conduct negotiations for final indirect cost rates. (242.705-1)
If agreement on indirect costs cannot be reached, the auditor will issue a DCAA Form 1, Notice of Contract Costs Suspended and/or Disapproved, in addition to an advisory report. (242.705-2)
DCMA administrative contracting officers may negotiate quick-closeout settlements for direct and indirect costs regardless of dollar value or percentage of unsettled costs. (242.708)
Defense contractors are encouraged to engage in independent research and development projects that advance DoD's future technology needs. (242.771-2)
The cognizant administrative contracting officer determines the allowability of IR&D and B&P costs, while DCAA submits an annual report on the DoD-wide B&P program. (242.771-3)

Who does what

Contracting officers

Assign criticality designators to contracts and change them as needed.
Process and execute novation and change-of-name agreements.
Determine the acceptability of a contractor's accounting system and pursue correction of weaknesses.

Contractors

Maintain an acceptable accounting system when receiving cost-reimbursement, incentive, time-and-materials, or labor-hour contracts, or contracts with progress payments based on costs.
Engage in independent research and development projects that advance DoD needs.
Comply with the terms of applicable business system clauses, such as the Accounting System Administration clause.

Agencies

DoD requires reimbursement from non-DoD organizations for contract administration services, with certain exceptions.
Defense Contract Audit Agency (DCAA) submits an annual report on the DoD-wide B&P program.
DCMA insurance/pension specialists and DCAA auditors assist ACOs in determining allowability of insurance/pension costs and conduct CIPRs when needed.

In practice

If you have a cost-reimbursement or similar contract, you must maintain an accounting system that meets DoD criteria and is subject to approval by the contracting officer.
For contracts with the Cost and Software Data Reporting clause, be prepared to discuss your CSDR process at the post-award conference.
If you perform IR&D or B&P work, the costs may be allowable, but the ACO will determine allowability and DCAA may audit.
Quick-closeout can speed up settlement of direct and indirect costs for a specific contract, task order, or delivery order, regardless of dollar value.

Common pitfalls

Assuming that all contracts can be administered at or near your facility; DFARS 242.202 restricts DoD activities from retaining such contracts except for specific types.
Failing to maintain an acceptable accounting system when required; the contracting officer can disapprove it and require correction.
Not addressing CSDR requirements in post-award conferences when the clause is included; this is mandatory under DFARS 242.503-2.
Ignoring DCAA Form 1 if issued for suspended or disapproved costs; it indicates a dispute that could affect payment.

Written by AI from this part's codified text (2026-10-04); cited sections are checked against the part. A guide, not legal advice: the regulation text, the solicitation and your contract rule.